Qantas wings it in Honkers

After failing to establish a ­premium carrier in Asia,
Qantas
boss
Alan Joyce
has fallen back on Jetstar to drive the airline’s push into the world’s fastest growing airline market.

Establishing a low-cost carrier in Hong Kong is not a bad consolation prize but it does not fix the issues at the Flying Kangaroo’s international mainline operations, which face extinction if they do not start making money.

Qantas plans to inject $100 million in start-up capital for the Hong Kong joint venture with China Eastern, a relatively small amount for what could be a lucrative foothold in China.

However, that should not distract from the fact that it is further investment in Jetstar and not the Qantas brand that continues to drive the ­airline’s growth.

While Qantas will not have the luxury of owning a premium carrier in the region off which to leverage the low-cost operations, this deal shows Joyce is not sitting on his hands and letting the Asia opportunity pass him by. The joint venture announced ­yesterday looks like a promising deal but it has challenges.

At first glance, Hong Kong seems long overdue for a low-cost carrier.

The city-state is a regional business hub with an affluent and well-travelled middle class. It boasts one of the world’s most efficient and spectacular airports and, more importantly, it offers a foothold in China.

But dig deeper and there are some valid reasons why a low-cost carrier has never made it in the former British colony even though only 5.5 per cent of flights out of the territory are on budget airlines.

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Oasis Hong Kong Airlines collapsed in 2008 after its model to operate long-haul, low-cost flights between Hong Kong and London and Vancouver failed.

Viva Macau, which briefly operated budget flights between Australia and the casino mecca of Macau, which is a short ferry hop from Hong Kong, also ran out of money in 2010 and closed down.

Jetstar may not be alone when it starts up in July. Hong Kong Express Airlines (which is owned by Hainan Airlines) announced in November it would launch a budget airline in the middle of this calendar year.

The jury is out about whether there is room in the densely populated ­territory for a budget airline. RBS Group analyst Mark ­Williams says the Hong Kong passenger travel market is similar in size to Sydney’s, with about 40 million passengers a year.

He cites numbers released from aviation consulting group CAPA – Centre for Aviation, which says low-cost carriers account for 5.5 per cent of flights out of Hong Kong compared with 39 per cent for Sydney.

While this implies a huge opportunity for Jetstar, Hong Kong has a higher cost base than in Singapore, Tokyo or Vietnam where it already has franchises.

Labour costs in the city, which has the world’s most expensive property prices, tower above those in other regional low-cost carrier hubs such as Kuala Lumpur, where rival AirAsia is based. Analysts also point to high landing and route costs at Asia’s third-busiest airport, which is operating at 89 per cent of capacity.

Hong Kong’s Chek Lap Kok does not have a budget terminal, and a final decision on a third runway is not due until 2015.

However, Qantas is betting its low cost of entry and securing a strong partner in the form of China Eastern will help it bypass the issues that faced other airlines that have tried and failed in Hong Kong.

It will also give Jetstar an important gateway into China, which Qantas predicts will more than double its travelling middle class to 700 million in the next decade.

It is the first time China has partnered with a foreign airline in the passenger space, and Qantas already has experience aligning a network between a full-service and low-cost carrier.

Qantas’s strategy of rolling out the Jetstar model in Singapore, Japan and Vietnam has proved successful so far, although the airline faces stiff competition from AirAsia, which also flies into Hong Kong.

Jetstar hopes Hong Kong could outshine other markets in the region as it provides an important gateway to the China market, although it is unlikely it will be allowed to operate within the booming domestic market there.

The timing of the deal looks suspiciously ideal to divert attention from Qantas’s failed efforts to launch a premium carrier in Asia.

However, Qantas is understood to have been working on both plans concurrently. In an ideal world, Joyce would have had a premium carrier in Singapore or Kuala Lumpur to keep investors sweet.

The joint venture does not resolve the issues surrounding Qantas’s loss-making mainline international business. If anything, it reconfirms ­Jetstar as the airline’s growth engine and will further anger unions worried that the traditional Qantas mainline business will be abandoned for Jetstar.

Jetstar’s underlying earnings before interest and taxation (EBIT) for the half year to December 30 were $147 million on revenue of $1.346 billion. This compared with Qantas’s EBIT of only $165 million despite posting more than four times the amount of revenue at $5.7 billion.

FILTH (Failed in London, Try Hong Kong) was a popular acronym bandied about it Hong Kong before the handover to China in 1997.

It epitomised an era when Western expatriates could pick up plum jobs and enjoy a level of success unattainable back home.

The same expression could eventually apply to Qantas if its plans to dominate Asia’s low-cost airline market thrives at the expense of its struggling Australia-based long-haul business.

Bank of Queensland
’s grim earnings forecast yesterday was a timely reminder for the state’s new Premier,
Campbell Newman
, about the economic challenges he faces.

With the election out of the way, the bank’s new boss, Stuart Grimshaw, took the opportunity to announce a higher than expected impairment on loans as property prices continue to tumble on the Gold and Sunshine coasts. He is also moving to raise $450 million in fresh capital to ward off any balance sheet threats from the economic downturn.

The raising and management restructure announced yesterday are typical of a new chief executive keen to clear the decks, although the size of the impairment took the market by surprise. Grimshaw is attempting to draw a line in the sand on the potential damage from slumping property values. But Bank of Queensland has been down this road before.

In December 2010 it announced it had found an additional $97 million in troubled assets in its commercial property portfolio, and lowered earnings forecasts as a result.

While the raising helps set the bank up for the Basel III regulatory reforms, the main reason is the continued fall in Queensland commercial property prices, particularly on the Sunshine and Gold coasts. Today’s announcement highlights the challenges facing Queensland’s economy since the devastating flooding last summer.

Perhaps more interesting is the reshuffle of Grimshaw’s senior ­management, announced yesterday.

Something is attracting
Commonwealth Bank of Australia
executives to the smaller regional player like moths to a flame.

Grimshaw, a former CBA executive, has lured Bankwest chief
Jon Sutton
up north to become his new chief operating officer. The surprise appointment came just three months after Sutton said he was taking a ­senior role with CBA.

Grimshaw also poached CBA’s Peter Deans as chief risk officer.

They follow a string of strong hires by Grimshaw in recent months as he completely revamps the bank’s top team.

While the capital raising looks like a wise move given current conditions and additional pressures from Basel III regulatory reforms, it is still too early to say whether Grimshaw has the formula for putting a horror 2011 behind the bank.

BoQ has been on notice since a series of natural disasters wiped out profits last summer.

Grimshaw remains faithful to BoQ’s owner-manager branch model, which he says has continued to produce better results in lending and deposit growth than corporate branches since the end of the 2011 financial year.

He also hopes to leverage the bank’s relationship with small to medium business and agribusiness.

However, even Grimshaw admits the bank was taken by surprise at the extent of the downturn in property valuations, while the impact of the high Australian dollar in Queensland is not helping.